Chapter
2
McGraw-Hill/Irwin1
Analyzing and
Recording
Transactions
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Explain the steps in processing transactions.
 Describe source documents and their purpose.
 Describe an account and its use in recording
transactions.
 Define debits and credits and explain their role in
double-entry accounting.
 Analyze business transactions using the
accounting equation.
 Analyze the impact of transactions on accounts.
 Identify and prepare basic financial statements
and explain how they interpret
McGraw-Hill/Irwin2
© The McGraw-Hill Companies, Inc., 2006
Analyzing and Recording Process
Transactions: Exchanges of economic
consideration between two parties.
External Transactions
occur between the
organization and an
outside party.
Internal Transactions
occur within the
organization.
Events refer to those happenings that affect an entity’s
accounting equation and can be reliably measured.
McGraw-Hill/Irwin3
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Describe source documents and their purpose.
McGraw-Hill/Irwin4
© The McGraw-Hill Companies, Inc., 2006
Source documents
 Source documents identify and describe
transactions and events entering the
accounting process.
 They are the sources of accounting
information.
 Source documents obtained from outside the
organization, provide objective and reliable
evidence about transactions and events and
their amount.
McGraw-Hill/Irwin5
© The McGraw-Hill Companies, Inc., 2006
Source Documents
Checks
Employee
Earnings
Record
Bills from
Suppliers
Purchase
Orders
Bank
Statement
Sales
Tickets
McGraw-Hill/Irwin6
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Describe an account and its use in recording
transactions.
McGraw-Hill/Irwin7
© The McGraw-Hill Companies, Inc., 2006
The Account and its Analysis
An account is a
record of
increases and
decreases in a
specific asset,
liability, equity,
revenue, or
expense item.
McGraw-Hill/Irwin8
The general
ledger is a record
containing all
accounts used by
the company.
© The McGraw-Hill Companies, Inc., 2006
Asset Accounts
Cash
Land
Buildings
Asset
Accounts
Accounts
Receivable
Notes
Receivabl
e
Prepaid
Accounts
Equipment
Supplies
McGraw-Hill/Irwin9
© The McGraw-Hill Companies, Inc., 2006
Asset account
 Cash: reflects a company’s cash balance.
 Account receivable: held by a seller and refer
to promises of payment from customers to
sellers. → credit sales or sales on account
 Note receivable: a written promise of another
entity to pay a definite sum of money on a
specified future date to the holder of the note.
 Prepaid account: represent prepayments of
future expenses. (ex. prepaid insurance)
McGraw-Hill/Irwin10
© The McGraw-Hill Companies, Inc., 2006
Asset account
 Supplies: belong to asset until they are used.
When they are used, their costs are
transferred from the asset accounts to
expense accounts.
 Equipment: When it is used and gets worn
down its cost is gradually reported as an
expense (called depreciation).
McGraw-Hill/Irwin11
© The McGraw-Hill Companies, Inc., 2006
Liability Accounts
Accounts
Payable
Notes
Payable
Liability
Accounts
Accrued
Liabilities
McGraw-Hill/Irwin12
Unearned
Revenues
© The McGraw-Hill Companies, Inc., 2006
Liability accounts
 Accounts payable: oral or implied promises to
pay later, commonly arise from purchases of
merchandise.
 Note payable: a formal promise, usually
denoted by the signing of a promissory note, to
pay a future amount.
 Accrued liabilities: They are amounts owed
that are not yet paid (ex. Wages payable,
taxes payable).
McGraw-Hill/Irwin13
© The McGraw-Hill Companies, Inc., 2006
Liability accounts
 Unearned revenue: a liability that is settled in
the future when a company delivers its
products or services. When customers pay in
advance for products or services (before
revenue is earned), the revenue recognition
principle requires that the seller consider this
payment as unearned revenue (ex. Unearned
ticket revenue).
McGraw-Hill/Irwin14
© The McGraw-Hill Companies, Inc., 2006
Equity Accounts
Owner’s
Capital
Owner’s
Withdrawals
Equity
Accounts
Revenues
McGraw-Hill/Irwin15
Expenses
© The McGraw-Hill Companies, Inc., 2006
Equity Accounts
Assets
+
Owner’s
Capital
McGraw-Hill/Irwin16
=
Liabilities
–
Owner’s
Withdrawals
+
Equity
–
+
Revenues
Expenses
© The McGraw-Hill Companies, Inc., 2006
Equity accounts
 Revenues: gross increase in equity from a
company’s earnings activities.
 Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owner’s
equity.
 Owner investments: the amounts an owner
puts into the company.
 Owner withdrawals: the amounts take away
from the company for personal use.
McGraw-Hill/Irwin17
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Define debits and credits and explain their role
in double-entry accounting.
McGraw-Hill/Irwin18
© The McGraw-Hill Companies, Inc., 2006
Debits and Credits (借&貸)
A T-account represents an account and is a tool
used to understand the effects of one or more
transactions.
T- Account
(Left side)
(Right side)
Debit
Credit
McGraw-Hill/Irwin19
© The McGraw-Hill Companies, Inc., 2006
Double-Entry Accounting
Assets
ASSETS
Debit
+
Normal
Balance
McGraw-Hill/Irwin20
Credit
-
=
Liabilities
LIABILITIES
Debit
-
Credit
+
Normal
Balance
+
Equity
EQUITIES
Debit
-
Credit
+
Nomal
Balance
© The McGraw-Hill Companies, Inc., 2006
Exh.
3.8
Double-Entry Accounting
Equity
Owner’s
Capital
_
Owner’s
Withdrawals
+
Revenues
_
Expenses
Capital
Withdrawals
Revenues
Expenses
Debit Credit
Debit Credit
Debit Credit
Debit Credit
-
+
Normal
Balance
McGraw-Hill/Irwin21
+
Normal
Balance
-
-
+
Normal
Balance
+
-
Normal
Balance
© The McGraw-Hill Companies, Inc., 2006
Double-Entry Accounting
 When there is a debited account, there must
be a credited account.
 The total amount debited must be equal to the
total amount credited for each transaction.
 The left side is the normal balance side for
assets, and the right side is the normal
balance side for liabilities and equity.
 有借必有貸，借貸必相等。
McGraw-Hill/Irwin22
© The McGraw-Hill Companies, Inc., 2006
Double-Entry Accounting
An account balance is the difference between
the increases and decreases in an account.
Cash
Investment by owner
Consulting services revenues earned
Collection of accounts receivable
Total increases
Less decreases
Balance
McGraw-Hill/Irwin23
30,000 Purchase of supplies
4,200 Purchase of equipment
1,900 Payment of rent
Payment of salary
Payment of note payable
Withdrawal by owner
36,100 Total decreases
(31,700)
4,400
2,500
26,000
1,000
700
900
600
31,700
© The McGraw-Hill Companies, Inc., 2006
Analyzing and Recording Process
Assets
=
Liabilities
+
Equity
T- Account
(Left side)
(Right side)
Debit
Credit
Step 1: Analyze
transactions and source
documents.
ACCOUNT NAME:
Date
Step 2: Apply doubleentry accounting
GENERAL JOURNAL
ACCOUNT No.
Description
PR
Debit
Credit
Balance
Step 4: Post entry to ledger
McGraw-Hill/Irwin24
Date
Description
Page
Post.
Ref.
Debit
123
Credit
Step 3: Record journal entry
© The McGraw-Hill Companies, Inc., 2006
Journalizing Transactions
Titles of Affected
Accounts
Transaction
Date
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
C. Taylor, Capital
Investment by owner
Dec. 2 Supplies
Transaction
Cash
explanation
McGraw-Hill/Irwin25
Purchased store supplies
PR
Page 1
Debit
Credit
30,000
30,000
2,500
Dollar amount
of
2,500
debits and credits
© The McGraw-Hill Companies, Inc., 2006
General journal (普通日記賬)
 General journal is used to record any
transaction and includes the following
information about each transaction: (1) date of
transaction; (2) titles of affected accounts; (3)
dollar amount of each debit and credit, and (4)
explanation of the transaction.
McGraw-Hill/Irwin26
© The McGraw-Hill Companies, Inc., 2006
Balance Column Account
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
CASH
Date
ACCOUNT No. 101
Description
PR
Debit
Credit
Balance
2,500
26,000
30,000
27,500
1,500
3,400
2004
Dec. 1
Dec. 2
Dec. 3
Dec. 10
McGraw-Hill/Irwin27
Investment by owner
Purchased supplies
Purchased equipment
Collection from customer
30,000
1,900
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
PR
Page 1
Debit
30,000
C. Taylor, Capital
Investment by owner
30,000
1
Dec. 2 Identify
Suppliesthe account.
Cash
CASH Purchased store supplies
for cash
Date
Description
Credit
2,500
ACCOUNT No.
PR
Debit
2,500
101
Credit
Balance
20,000.00
########
2004
Purchased equipment
McGraw-Hill/Irwin28
Dec. 3
G1
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
PR
Page 1
Debit
30,000
C. Taylor, Capital
Investment by owner
30,000
2 Supplies
Enter
the date.
2Dec.
CASH
Date
Credit
2,500
Cash
Purchased store supplies
for cash
Description
PR
Purchased equipment
G1
ACCOUNT No.
Debit
2,500
101
Credit
Balance
20,000.00
########
2004
Dec. 1
McGraw-Hill/Irwin29
Dec. 3
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
PR
Page 1
Debit
Credit
30,000
C. Taylor, Capital
Investment by owner
30,000
3
Enter the amount and description.
Dec. 2 Supplies
2,500
Cash
CASH Purchased store supplies
ACCOUNT No.
for cash
Date
Description
PR
Debit
Credit
2,500
101
Balance
2004
Dec. 1
Investment by owner
Purchased equipment
McGraw-Hill/Irwin30
Dec. 3
30,000
G1
20,000
(20,000)
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
PR
Page 1
Debit
Credit
30,000
C. Taylor, Capital
Investment by owner
30,000
4
Dec. 2 Supplies
2,500
Enter the journal reference.
Cash
CASH Purchased store supplies
ACCOUNT No.
for cash
Date
Description
PR
Debit
Credit
2,500
101
Balance
2004
Dec. 1
Investment by owner
G1
Purchased equipment
G1
McGraw-Hill/Irwin31
Dec. 3
30,000
20,000
(20,000)
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
Page 1
PR
Debit
Credit
30,000
C. Taylor, Capital
Investment by owner
30,000
Dec. 2 Supplies Compute the balance.
Cash
CASH Purchased store supplies
for cash
Date
Description
PR
Debit
2,500
ACCOUNT No.
Credit
2,500
101
Balance
2004
Dec. 1
Investment by owner
G1
Purchased equipment
G1
McGraw-Hill/Irwin32
Dec. 3
30,000
5
20,000
30,000
(20,000)
© The McGraw-Hill Companies, Inc., 2006
Posting Journal Entries
GENERAL JOURNAL
Date
2004
Dec. 1 Cash
Description
Page 1
PR
Debit
101
Credit
30,000
C. Taylor, Capital
Investment by owner
30,000
Dec. 2 Supplies
Enter the
Cash
CASH Purchased store supplies
for cash
Date
Description
PR
2,500
ledger reference.
ACCOUNT No.
Debit
Credit
6
2,500
101
Balance
2004
Dec. 1
Investment by owner
G1
Purchased equipment
G1
McGraw-Hill/Irwin33
Dec. 3
30,000
30,000
20,000
(20,000)
© The McGraw-Hill Companies, Inc., 2006
Analyzing Transactions – An Illustration
Chuck Taylor invested $30,000 in FastForward on
Dec. 1.
Transaction:
Analysis:
Assets
=
Liabilities
Cash
30,000
+
Equity
Capital
30,000
Double entry:
(1)
Cash
101
301
C. Taylor, Capital
30,000
30,000
Posting:
(1)
McGraw-Hill/Irwin34
Cash
30,000
101
C. Taylor, Capital
(1)
301
30,000
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Analyze business transactions using
the accounting equation.
 Analyze the impact of transactions on
accounts.
McGraw-Hill/Irwin35
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis Equation
The accounting equation must remain in
balance after each transaction.
Assets
McGraw-Hill/Irwin36
=
Liabilities
+
Equity
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (1)
Chuck Taylor, the owner, contributed
$30,000 cash to start the business,
FastForward.
The accounts involved are:
(1) Cash (asset)
(2) Taylor, Capital (equity)
McGraw-Hill/Irwin37
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (1)
Chuck Taylor, the owner, contributed $30,000
cash to start the business.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
$ 30,000 $
-
$ 30,000
McGraw-Hill/Irwin38
$
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
+
Equity
Taylor,
Capital
$ 30,000
$ 30,000
$ 30,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (1)
(1)
Cash
30,000
101
301
C. Taylor, Capital
(1) 30,000
Dr. Cash
Cr. C. Taylor, Capital
McGraw-Hill/Irwin39
30,000
30,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (2)
FastForward purchased supplies
paying $2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
McGraw-Hill/Irwin40
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (2)
Purchased supplies paying $2,500 cash.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
$ 27,500 $ 2,500 $
$ 30,000
McGraw-Hill/Irwin41
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
+
Equity
Taylor,
Capital
$ 30,000
$ 30,000
$ 30,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (2)
(2)
Supplies
2,500
Dr. Supplies
Cr. Cash
McGraw-Hill/Irwin42
126
(1)
Cash
30,000
101
(2)
2,500
2,500
2,500
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (3)
FastForward purchased equipment for
testing athletic shoes for $26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
McGraw-Hill/Irwin43
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (3)
Purchased equipment for $26,000 cash.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
(3) (26,000)
$ 26,000
$ 1,500 $ 2,500 $
$ 30,000
McGraw-Hill/Irwin44
26,000
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
+
Equity
Taylor,
Capital
$ 30,000
$ 30,000
$ 30,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (3)
Equipment
26,000
(3)
Dr. Equipment
Cr. Cash
McGraw-Hill/Irwin45
167
(1)
Cash
30,000
(2)
(3)
101
2,500
26,000
26,000
26,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (4)
FastForward purchased Supplies of
$7,100 on credit from CalTech.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
McGraw-Hill/Irwin46
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (4)
Purchased Supplies of $7100 on credit.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
(3) (26,000)
$ 26,000
(4)
7,100
$ 1,500 $ 9,600 $
$ 37,100
McGraw-Hill/Irwin47
Liabilities
Accounts
Payable
+
Equity
Taylor,
Capital
$ 30,000
$ 7,100
26,000
$ 7,100
=
$ 30,000
$ 37,100
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (4)
(2)
(4)
Supplies
26,000
7,100
126
201
Accounts Payable
(4) 7,100
Dr. Supplies
Cr. Accounts Payable
McGraw-Hill/Irwin48
7,100
7,100
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (5)
FastForward earned revenues of $4,200 from
consulting with clients about test results on
athletic shoes.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
McGraw-Hill/Irwin49
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (5)
Earned revenues of $4,200.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
(3) (26,000)
$ 26,000
(4)
7,100
(5)
4,200
$ 5,700 $ 9,600 $ 26,000
$ 41,300
McGraw-Hill/Irwin50
Liabilities
+ Equity
Accounts Taylor,
Payable Capital
Revenus
$ 30,000
$ 7,100
$
$ 7,100 $ 30,000
=
$ 4,200
$ 4,200
$ 41,300
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (5)
403
Consulting Revenue
(5)
4,200
(1)
(5)
Cash
30,000
(2)
4,200
(3)
Cr. Cash
Dr. Consulting revenue
McGraw-Hill/Irwin51
101
2,500
26,000
4,200
4,200
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets
=
Cash
Supplies Equipment
Bal. $ 5,700 $ 9,600 $ 26,000
$ 5,700 $ 9,600 $
$ 41,300
26,000
=
Liabilities
+
Equity
Accounts Taylor,
Payable Capital
$ 7,100 $ 30,000
Revenue
$ 4,200
$
$ 4,200
7,100 $ 30,000
$ 41,300
Now let’s look at some other transactions.
McGraw-Hill/Irwin52
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6)(7)
Paid $1000 rent to the landlord of the building
where the store is located, and paid biweekly
$700 salary to employee.
The accounts involved are:
(1) Cash (asset)
(2) Expense (equity)
McGraw-Hill/Irwin53
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6)(7)
Remember that the balance in the rent and
salaries expense accounts actually
increases.
But, equity actually decreases because
expenses reduce equity.
McGraw-Hill/Irwin54
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6) (7)
Paid $1000 rent to the landlord and
biweekly $700 salary to employee.
Assets
=
4,000 $
9,600 $
$ 39,600
McGraw-Hill/Irwin55
+
Equity
Accounts Taylor,
Payable+ Capital+ + Revenue- Expense
$ 7,100 $ 30,000
$ 4,200
$ (1,700)
Cash+ Supplies+ Equipment
Bal. $ 5,700 $ 9,600 $ 26,000
(6)(7)
(1,700)
$
Liabilities
26,000
$ 7,100 $ 30,000
=
$
4,200 $ (1,700)
$ 39,600
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6) (7)
Remember that expenses decrease equity.
McGraw-Hill/Irwin56
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6) (7)
(6)
Rent Expense
1000
(1)
(5)
Cash
30,000
4,200
McGraw-Hill/Irwin57
640
(2)
(3)
(6)
2,500
26,000
1,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (6) (7)
Salaries Expense
(7)
700
(1)
(2)
Dr. Rent Expense
Dr. Salaries Expense
Cr. Cash
McGraw-Hill/Irwin58
Cash
30,000
(2)
4,200
(3)
(6)
(7)
2,500
26,000
1,000
700
1,000
700
1,700
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (8)
Provided services of $1600 and rent its test facilities
for $300. The cash will be received in the future.
The accounts involved are:
(1) Accounts Receivable (asset)
(2) Revenue (equity)
McGraw-Hill/Irwin59
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (8)
Provided services of $1600 and rent its test
facilities for $300.
Assets
Cash
Bal. $ 5,700
(6)(7) (1,700)
(8)
Account
Receivable
Supplies Equipment
$ 9,600
26000
1,900 $ 9,600 $ 26,000
$ 41,500
Equity
$ 7,100
Taylor,
Capital Revenue- Expenses
$ 30,000
$ 4,200 $ (1,700)
$ 1,900
$ 7,100
$ 30,000 $
Accounts
Payable
1900
$ 4,000 $
McGraw-Hill/Irwin60
= Liabilities +
6,100 $
(1,700)
= $41,500
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (8)
(8)
Accounts Receivable
1,900
Consulting Revenue
(5)
4,200
(8)
1,600
Rental Revenue
(8)
300
Dr. Accounts Receivable 1,900
Cr. Consulting Revenue
Cr. Rental Revenue
McGraw-Hill/Irwin61
1,600
300
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (9)
 The client in transaction 8 paid $1900 to
FastForward 10 days later.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Receivable (asset)
McGraw-Hill/Irwin62
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (9)
The client in transaction 8 paid $1900 to Fastforward.
Assets
= Liabilities +
Account
Receivable
$ 41,500
McGraw-Hill/Irwin63
$ 7,100
Taylor,
Capital Revenue- Expenses
$ 30,000
$ 4,200 $ (1,700)
$ 1,900
$ 7,100
$ 30,000 $
Accounts
Payable
Cash
Supplies Equipm ent
Bal. $ 5,700
$ 9,600
26000
(6)(7) (1,700)
(8)
1900
(9)
1900
(1,900)
$ 5,900 $
$ 9,600 $ 26,000
=
Equity
6,100 $
(1,700)
$41,500
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (9)
Cash
30,000
(2)
4,200
(3)
1,900
(6)
(7)
(1)
(2)
(9)
Dr. Cash
2,500
26,000
1,000
700
(8)
Accounts Receivale
1,900
(9)
1,900
1,900
Cr. Accounts Receivable
McGraw-Hill/Irwin64
1,900
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (10)
 Paid $900 cash as partial payment for its
earlier $7100 purchase of supplies,
leaving $6200 unpaid.
The accounts involved are:
(1) Cash (asset)
(2) Accounts Payable (liability)
McGraw-Hill/Irwin65
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Transaction Analysis (10)
Paid $900 cash as partial payment for its earlier
purchase on credit.
Assets
= Liabilities +
Account
Receivable
Accounts
Payable
Cash
Supplies Equipm ent
Bal. $ 5,700
$ 9,600
26000
(6)(7) (1,700)
(8)
1900
(9)
1900
(1,900)
(10)
(900)
$ 5,000 $
$ 9,600 $ 26,000
$ 40,600
McGraw-Hill/Irwin66
$ 7,100
(900)
$ 6,200
=
Equity
Taylor,
Capital Revenue- Expenses
$ 30,000
$ 4,200 $ (1,700)
$ 1,900
$ 30,000 $
6,100 $
(1,700)
$40,600
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (10)
(10)
Accounts Payable
900
(4)
7,100
(1)
(2)
(9)
Cash
30,000
(2)
4,200
(3)
1,900
(6)
(7)
(10)
2,500
26,000
1,000
700
900
Dr. Accounts Payable 900
Cr. Cash
McGraw-Hill/Irwin67
900
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (11)
Taylor withdrew $600 from the
business for personal use.
The accounts involved are:
(1) Cash (asset)
(2) Taylor, Withdrawals (equity)
McGraw-Hill/Irwin68
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (11)
Remember that the balance in the Taylor,
Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
McGraw-Hill/Irwin69
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (11)
Taylor withdrew $600 from the business for
personal use.
Assets
= Liabilities +
Account
Receivable
Accounts
Payable
Cash
Supplies Equipm ent
Bal. $ 5,700
$ 9,600
26000
(6)(7) (1,700)
(8)
1900
(9)
1900
(1,900)
(10)
(900)
(11)
(600)
$ 4,400 $
$ 9,600 $ 26,000
$ 40,000
McGraw-Hill/Irwin70
$ 7,100
Equity
Taylor,
Capital Revenue- Expenses
$ 30,000
$ 4,200 $ (1,700)
$ 1,900
(900)
$ 7,100
=
$ (600)
$ 29,400 $
6,100 $
(1,700)
$40,000
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (11)
Remember that withdrawals decrease equity.
McGraw-Hill/Irwin71
© The McGraw-Hill Companies, Inc., 2006
Transaction Analysis (11)
(11)
Taylor, Withdrawals
600
(1)
(2)
(9)
Dr. Taylor, Withdrawals
Cr. Cash
McGraw-Hill/Irwin72
Cash
30,000
(2)
4,200
(3)
1,900
(6)
(7)
(10)
(11)
2,500
26,000
1,000
700
900
600
600
600
© The McGraw-Hill Companies, Inc., 2006
 Ending Balance = Beginning Balance + Total
Increase – Total Decrease
McGraw-Hill/Irwin73
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Ending balance = Beginning balance + total debits
– total credits
(1)
(2)
(9)
Cash
30,000
(2)
4,200
(3)
1,900
(6)
(7)
(10)
(11)
2,500
26,000
1,000
700
900
600
Total Debits 36,100 Total Credits 31,700
Ending Balance 4,400
McGraw-Hill/Irwin74
© The McGraw-Hill Companies, Inc., 2006
Ending balance = Beginning balance + total
credits – total debits
(10)
McGraw-Hill/Irwin75
Accounts Payable
900
(4)
Balance
7,100
6200
© The McGraw-Hill Companies, Inc., 2006
After processing its remaining transactions for December,
FastForward’s Trial Balance is prepared.
FastForward
Trial Balance
December 31, 2004
Cash
Accounts receivable
Supplies
Prepaid Insurance
Equipment
Accounts payable
Unearned consulting revenue
C. Taylor, Capital
C. Taylor, Withdrawals
Consulting revenue
Rental revenue
Salaries expense
Rent expense
Utilities expense
Total
McGraw-Hill/Irwin76
Debits
$ 4,400
9,270
Credits
2,400
26,000
$
6,200
3,000
30,000
600
The trial balance lists
all account balances
in the general ledger.
If the books are in
balance, the total
debits will equal the
total credits.
5,800
300
1,400
1,000
230
$ 45,300 $ 45,300
© The McGraw-Hill Companies, Inc., 2006
Searching for and Correcting Errors
If the trial balance does not balance, the
error(s) must be found and corrected.
Make sure the trial balance
columns are correctly added.
Recompute each account
balance in the ledger.
Make sure account
balances are correctly
entered into the ledger.
Verify that each journal
entry is posted correctly.
See if debit or credit
accounts are mistakenly
placed on the trial balance.
Verify that each original
journal entry has equal
debits and credits.
McGraw-Hill/Irwin77
© The McGraw-Hill Companies, Inc., 2006
Using a Trial Balance to Prepare
Financial Statements
Point in
Time
Point in
Time
Period of Time
Income Statement
Statement of Owner’s Equity
Beginning
Balance
Sheet
McGraw-Hill/Irwin78
Income Statement of
Cash Flows
Ending
Balance
Sheet
© The McGraw-Hill Companies, Inc., 2006
Learning objective
 Identify and prepare basic financial
statements and explain how they
interpret.
McGraw-Hill/Irwin79
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Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
McGraw-Hill/Irwin80
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Financial Statements
 Income Statement: revenues and expenses
together with the how much profit the firm makes.
 Statement of Owner’s Equity: reports information
how equity changes over the reporting period.
 Balance Sheet: a company’s financial position at a
point of time.
 Statement of cash flows: cash receipts and cash
payments over a period of time.
McGraw-Hill/Irwin81
© The McGraw-Hill Companies, Inc., 2006
Fastforward
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
$
5,800
Rent revenue
$
300
Expenses:
Rent expense
1000
Salaries expense
700
Net income
$
4,400
Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a company’s
revenues and expenses along with the resulting net
income or loss over a period of time due to earnings
activities.
McGraw-Hill/Irwin86
© The McGraw-Hill Companies, Inc., 2006
Fastforward
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
$
5,800
Rent revenue
$
300
Expenses:
Rent expense
1000
Salaries expense
700
Net income
$
4,400
The Statement of
Owner’s Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
McGraw-Hill/Irwin87
The net income
of $4,400
increases
Scott’s capital
by $4,400.
Fastforward
Statement of Owner's Equity
For Month Ended December 31, 2004
Taylor, Capital, Dec. 1, 2004
Plus: Investment by owner
Net income
Less: Withdrawals
Taylor, Capital, Dec. 31, 2004
$
$
30,000
4,400
600
33,800
© The McGraw-Hill Companies, Inc., 2006
The Balance Sheet
describes a
company’s
financial position
at a point in time.
Fastforward
Statement of Owner's Equity
For Month Ended December 31, 2004
Taylor, Capital, Dec. 1, 2004
Plus: Investment by owner
Net income
Less: Withdrawals
Taylor, Capital, Dec. 31, 2004
$
$
30,000
4,400
600
33,800
Fastforward
Balance Sheet
December 31, 2004
Assets
$
Cash
Supplies
Equipment
Total assets
McGraw-Hill/Irwin88
$
4,400
9,600
26,000
40,000
Liabilities & Equity
Accounts payable
$
Total liabilities
Taylor, Capital
Total liabilities and equity
6,200
6,200
33,800
$
40,000
© The McGraw-Hill Companies, Inc., 2006
Fastforward
Statement of Cash Flows
For Month Ended December 31, 2004
Cash flows from operating activities:
Cash received from clients
$ 6,100
Purchase of supplies
(3,400)
Cash paid for rent
(1,000)
Cash paid to employees
(700)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(26,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by owner
30,000
Withdrawal by owner
(600)
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2004
Cash balance, December 31, 2004
$
1,000
(26,000)
$
$
29,400
4,400
4,400
The Statement of Cash Flows identifies cash
inflows and cash outflows over a period
of time.
© The McGraw-Hill Companies, Inc., 2006
McGraw-Hill/Irwin89
Return on Assets (ROA)
Net income ÷ Average total assets
ROA is viewed as an
indicator of operating
efficiency.
McGraw-Hill/Irwin90
© The McGraw-Hill Companies, Inc., 2006
ROA of mobile phone service
companies in HK





SUNDAY: 0.34%
SMARTONE: 9.92%
Hutchison Telecommunications: 0.18%
PEOPLES: 15.47%
City Telecom: 2.94%
- Which company is better?
McGraw-Hill/Irwin91
© The McGraw-Hill Companies, Inc., 2006
Debt Ratio
o Describes the relationship between the
amounts of the company’s liabilities and
assets.
Total Liabilities
Debt Ratio =
Total Assets
o Helps to assess the risk that a company will
fail to pay its debts.
McGraw-Hill/Irwin92
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Review of Chap 2
 Identify asset accounts, liability accounts and
equity accounts.
 Know the meaning of double-entry accounting
and how to do journals and post journal entries
correctly.
 Prepare trial balance and use a trial balance to
prepare income statement, statement of
owner’s equity and balance sheet statement.
 ROA and debt ratio.
McGraw-Hill/Irwin93
© The McGraw-Hill Companies, Inc., 2006
Homework of chapter 2
 Ex 2-1, 2-3, 2-4, 2-19
 Problem 2-1A, 2-4A
 Due on June 12 (Monday)
McGraw-Hill/Irwin94
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End of Chapter 2
McGraw-Hill/Irwin95
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